Viewing cable 05SANJOSE2850

05SANJOSE28502005-12-14 00:02:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy San Jose
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 04 SAN JOSE 002850 
E.O. 12958: DECL: 12/13/2015 
Classified By: Ambassador Mark Langdale for Reasons 1.4 (b) and (d) 
¶1.  (U) SUMMARY: Embassy San Jose warmly welcomes CODEL Blunt 
on its December 19 ) 20 visit to Costa Rica.  The 
delegation's visit comes at a time when the main issue in the 
bilateral relationship is the Central America-Dominican 
Republic-United States Free Trade Agreement (CAFTA-DR).  The 
debate has just started in the Costa Rican unicameral 
57-member legislature (the Assembly), and the entire 
ratification process will take at least six months due to the 
required legislative process and the elections on February 5, 
2006 of a new President and new Assembly members (deputies). 
(Note: The Costa Rican Constitution does not allow elected 
officials to serve consecutive terms.  End Note.)  End 
¶2.  (SBU) Costa Rica has a strong history of democracy and of 
making decisions by consensus.  In 1948, after a brief civil 
war, the army was abolished to preclude military interference 
in the country's politics and to allow a greater 
concentration of resources for universal health care, 
education, and a relatively generous social welfare system. 
The consensus-building aspect of democracy in Costa Rica 
results in slow decision-making but has allowed Costa Rica to 
avoid the civil wars that wracked its Central American 
neighbors in the latter half of the twentieth century.  As a 
result, Costa Rica is the most developed country in Central 
America with the lowest poverty and unemployment rates, 
lowest infant mortality rates, and highest GDP per capita. 
¶3.  (SBU) To spur development in the middle of the last 
century, the legislature created state-owned monopolies in 
the banking, electricity, telecommunications, petroleum 
distribution, and insurance markets.  Income from these 
institutions was used to help the poor and ensure services 
reached all corners of the country.  But over the years these 
institutions have become large, bloated, and inefficient 
entities that deliver poor quality services and are 
susceptible to corruption.  Despite these faults, many Costa 
Ricans continue to view these organizations as venerable 
institutions that demonstrate that the state will continue to 
take care of them. 
¶4.  (SBU) The current President, Abel Pacheco (Louisiana 
State University-educated psychiatrist), was elected in the 
country's first-ever run-off election in April 2002 in which 
he won 58 percent of the vote.  President Pacheco is in his 
final months as President, and he has seen his popularity 
rating drop during the course of his administration.  This is 
due in part to his accepting gifts and favors which violated 
the same anti-corruption laws that he championed, but is 
principally due to a generally-held low opinion of his 
effectiveness as president.  President Pacheco has seen 18 
cabinet-level ministers resign, some over the President's 
uneven and wavering support for CAFTA-DR.  Most of the 
management of the Ministry of Foreign Trade (COMEX) that was 
responsible for negotiating and implementing the agreement 
left the organization over the last 18 months. 
¶5. (C) Relations between the United States and Costa Rica are 
friendly, abiding, and complex.  We share core political 
values, including a belief in democracy and a commitment to 
human rights.  Like the United States, Costa Rica does not 
have formal diplomatic relations with Cuba and is concerned 
about attempts by the Venezuelan government to increase its 
influence in the hemisphere.  Although Costa Rica has no 
military, the Costa Rican Coast Guard and police cooperate 
closely with the U.S. Coast Guard, Navy, and Drug Enforcement 
Agency (DEA) in narcotics interdiction.  In August 2004, 
President Pacheco signed the seven-nation Central 
America-Dominican Republic-U.S. Free Trade Agreement 
(CAFTA-DR) but, because of his inordinate fear of protests by 
public sector unions and university students, he waited until 
October 2005 after every other potential partner had already 
ratified the treaty before submitting it to the legislature 
to begin the lengthy process of ratification.  As a result, 
Costa Rica will likely be the last country to join CAFTA-DR. 
On December 7 Peru and the U.S. finished negotiations on a 
free trade agreement. 
¶6. (C) U.S. economic assistance to Costa Rica has fallen 
dramatically since 1995 when we closed our bilateral USAID 
mission.  There was an upsurge in U.S. military and 
counternarcotics assistance with the signing of a Bilateral 
Maritime Agreement in 1998, but that assistance has now been 
reduced very substantially because of Costa Rica's 
unwillingness to sign an Article 98 agreement (committing 
Costa Rica not to surrender U.S. nationals to the 
International Criminal Court) and a shift in priorities in 
the State Department's Bureau of International Narcotics and 
Law Enforcement Affairs (INL).  Failure to sign an Article 98 
agreement also has caused Costa Rica to be ineligible for 
trade capacity-building funds to implement CAFTA-DR.  This 
decline in assistance, which is viewed as "sanctions" by many 
in the GOCR and the press, unavoidably diminishes U.S. 
influence in Costa Rica and affects the level of cooperation 
in the areas of counternarcotics, counterterrorism, and trade. 
¶7. (C) The Pacheco Administration, which took office in May 
2002, has been characterized by passivity, inactivity, and, 
stated bluntly, a leadership void.  Admittedly, the president 
has had to deal with a fragmented legislature where often a 
small minority can prevent action.  Further complicating 
governance in Costa Rica are a supreme court and autonomous 
regulatory bodies that insert themselves in matters we 
normally think of as the prerogative of the executive branch, 
such as whether or not to support the U.S.-led coalition in 
Iraq.  The next general elections in Costa Rica are scheduled 
for February 5, 2006, and we expect far more vigorous 
leadership if former president and current front-runner Oscar 
Arias is elected.  Arias is much more committed to 
free-market policies and CAFTA-DR than is Pacheco, but with 
respect to some international issues, such as the use of 
military force and levels of economic assistance from rich to 
poor countries, Arias will likely be at odds with the United 
¶8.  (U) Costa Rica is the only CAFTA-DR signatory country not 
to have already ratified the agreement.  Fourteen months 
after signing CAFTA-DR and after much public debate over 
whether or not the agreement would benefit the poor, 
President Pacheco on October 21, 2005 finally sent the 
agreement to the Assembly to start the relatively long 
ratification process.  Currently, the Assembly's 
International Relations and Trade Committee is studying 
CAFTA-DR and holding hearings with various groups about the 
¶9.  (U) Due to the legislative recess from December 23, 2005 
through February 13, 2006 for the holidays and the national 
elections, completion of the Committee's work is expected no 
sooner than the end of April 2006, just before the new 
deputies take office on May 1, 2006.  (Note: The new 
Administration takes office on May 8, 2006.  End Note.) 
After the Committee has sent its findings to the Assembly 
floor, two separate votes by the Assembly are required to 
pass the agreement, between which the Constitutional Court 
will review CAFTA-DR for any legal or procedural issues. 
The total ratification process will take at least six months 
and most likely longer. 
¶10.  (SBU) Unlike the path taken by the U.S. Congress, the 
Assembly will approve CAFTA-DR separately from the 
legislation that will actually implement the agreement.  To 
date, the implementing legislation has not been sent to the 
Assembly, and passing these bills could be as difficult as 
passing CAFTA-DR.  These bills should effect the gradual 
phased opening of the telecommunications and insurance 
markets to competition ) markets that are currently legally 
monopolized by the state-owned Costa Rican Institutes of 
Electricity (ICE) and Insurance (INS), respectively. 
¶11.  (SBU)  Public knowledge of and support for CAFTA-DR has 
grown over the last year with an October 2005 CID/Gallup poll 
revealing that 64 percent of the respondents were at least 
&somewhat8 in favor of the agreement.  Those responding 
that they were &somewhat8 or &very much8 opposed 
constituted 26 percent.  Sixty-one percent of those who knew 
something about the agreement responded that they thought 
CAFTA-DR would benefit Costa Rica. 
¶13.  (U) Due to its small size, geographic location, and 
limited natural resources, Costa Rica relies heavily on 
foreign trade and investment.  The United States provides 46 
percent of Costa Rica's imports and consumes 44 percent of 
Costa Rican exports.  According to the U.S. Census Bureau, 
through September 2005, two-way trade between the U.S. and 
Costa Rica amounted to approximately USD 5.1 billion.  Total 
trade for 2004 was USD 6.6 billion, a 12-percent increase 
from 2003.  Costa Rica accounts for one-third of U.S. trade 
with the five Central American CAFTA-DR countries.  Over the 
last twenty years, Costa Rica has taken steps to diversify 
its economy and, as a result, has become less dependent on 
the traditional agricultural crops for generating revenue. 
In general Costa Rica has integrated itself more into the 
global economy; growing imports and exports are proof of that. 
¶14.  (U) Costa Rica exported USD 2.8 billion worth of goods 
to the U.S. in 2004.  Traditional agricultural products such 
as bananas and coffee dominated exports 20 years ago.  Now 
integrated circuits and medical devices are the top exports 
to the U.S. from Costa Rica.  With regard to revenue 
generation, tourism is number one in Costa Rica. 
Approximately 1.6 million visitors came to Costa Rica in 
2004, more than 600,000 of them from the U.S., generating USD 
1.4 billion.  Through the first half of this year, tourism 
income is up 17 percent as compared to the same period last 
year.  Tourism also plays a special role in the Costa Rican 
economy by providing approximately 300,000 direct and 
indirect jobs, a large portion outside the San Jose area. 
¶15.  (U) Costa Rica imported USD 3.8 billion worth of U.S. 
goods from the U.S. in 2004.  Top imported items included 
semiconductors and textile materials.  The U.S. is a major 
supplier of corn, wheat, rice, soybeans, and consumer foods 
to Costa Rica.  Costa Rica is a solid market for U.S. 
agricultural exports, but the U.S. currently imports from 
Costa Rica more than three times what it exports to Costa 
¶16.  (U) The total flow of foreign direct investment (FDI) 
into Costa Rica was USD 596 million in 2004, 66 percent of 
which came from the U.S.  The Central Bank of Costa Rica 
estimates that FDI will fall to USD 540 million in 2005 based 
on a declining investment climate.  FDI is concentrated in 
the industrial manufacturing sector which attracted USD 437 
million in 2004, followed by the tourism and services sectors 
which attracted USD 51 and USD 37 million, respectively. 
¶17.  (U) Global economic changes affect Costa Rica's economy. 
 For instance, the increase in gasoline prices in 2005 hit 
Costa Ricans especially hard since they have no domestic oil 
production capabilities.  Costa Rica's economy is also 
affected by operations of large multi-national companies that 
have manufacturing and service operations in Costa Rica. 
Intel has a large operation in Costa Rica and its growth or 
lack thereof has a noticeable effect on the economic 
situation.  In 2003 when Intel's exports increased 32 
percent, the Costa Rican economy grew 5.6 percent.  In 2004, 
Intel's exports dropped and growth was 4.2 percent.  (Note: 
The growth could have been lower but was helped by continued 
strong growth in non-traditional agricultural exports that 
year.  End Note)  GDP growth for 2005 is expected to be 
approximately 4.1 percent.  Inflation remains a significant 
macroeconomic challenge, and at 14.2 percent over the last 
twelve months it is at its highest level in eight years and 
one of the highest rates in Latin America.  The 
higher-than-expected inflation and slower-than-expected 
growth in exports led the Central Bank to increase the rate 
of colon (the local currency) devaluation against the dollar 
in July 2005. 
¶18.  (U) The fiscal deficit is one of Costa Rica's most 
serious macroeconomic problems.  More than 90 percent of the 
GOCR's income is used to pay government salaries, pensions, 
social benefits, and interest payments on the national debt. 
The central government's fiscal deficit is projected to be 
about 2.8 percent of GDP for 2005.  This compares to 2.5 and 
3.0 percent of GDP for 2004 and 2005, respectively.  Fiscal 
reform legislation, one of the Pacheco Administration's 
primary goals, has languished in the legislature for over 
three years.  This proposal is mainly a tax increase and does 
not contemplate spending cuts.  The President's bill has been 
blocked by the minority Libertarian Movement (ML) Party in 
the Assembly. 
¶19.  (U) At the end of 2004, Costa Rica's public sector debt 
topped USD 10.5 billion.  The central government's deficit is 
largely financed by government borrowing and the surpluses 
generated by some state-owned monopolies (which include 
telecommunications, electrical power, insurance, and 
petroleum distribution).  In late 2004, the GOCR, unable to 
attract investors on the open market, resorted to forcing 
state-owned service providers to take on government debt to 
allow the GOCR to meet its end-of-year obligations.